Debt-free alternative to student loans promising
With Americans owing more than $1.3 trillion in federal student-loan debt, some places are offering students an alternative: Pay us nothing up front, but give us a percentage of your future income. The government should encourage the spread of this innovation -- with regulations that limit risks.
Income-share agreements require students who receive financial aid to make payments after they leave school. These former students don't pay interest and aren't locked into servicing debt indefinitely. Instead, they pay lenders a share of their future earnings over a fixed period, with the exact percentage dependent on their major, profession and starting salary.
These agreements also differ from income-based repayment plans, under which payments are capped at 10 percent of a former student's income. This is an existing program that should be expanded, but it is still a government loan. Income-share agreements do not require public money.
A small but growing number of colleges and trade schools have introduced these agreements to help students cover tuition and fees. Students get protection from being saddled with unaffordable debt should they end up unemployed or in low-paying careers. Students who enter high-paying professions may pay back more than the initial subsidy they receive -- which is what makes such agreements appealing to investors.
Most important, as noted, these agreements don't put taxpayer money at risk -- a feature particularly compelling given what the federal government expects to lose on its student-loan portfolio. But Congress and the administration need to establish rules that provide clarity to potential investors and protect students from abuses.
Two bills in Congress offer a promising start. They cap the percentage of income that recipients pay, establish a minimum income threshold for payment and limit lengths of contracts. Federal regulators would draw up model disclosure forms for lenders to provide students.
It's unlikely traditional student loans will be replaced by income-share agreements anytime soon, if ever. But at least Congress can help them become a viable option.